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Different Types of Mortgages

100%
This allows you to borrow the full amount of the sale price of your property. Generally has a higher interest rate, and should the price of the property drop, the amount of the mortgage is higher than if you were to sell the property outright.

Bad or Averse Credit
Due to the highly competitive mortgage market, even borrowers with financial problems are offered mortgages by lenders that specialize in bad credit mortgages. These have higher interest rates than standard mortgages and usually do not offer any of the introductory deals given to other applicants. Additionally, bad credit mortgages often have high early redemption penalties.

Bridging Loan
In the context of buying property, a bridging loan is intended to take care of the gap between buying a new home and selling your former property. This is often the case when you’ve found your new home and need to finalize the sale by paying the vendor but you have yet to find a buyer for your old property. A bridging loan is meant to cover the shortfall of funds in such situations.

Buy to Let
You may be able to organise a larger mortgage than normal due to the fact that you intend to rent the property out to tenants. In most cases, rents (which will be used to pay the mortgage) are much higher than mortgage payments. While many buy to let mortgages offer the same choices as traditional mortgages, you can’t take out a standard mortgage so be sure to notify your lender about the purpose of the mortgage and that you intend to let the property. Don’t forget to budget for the associated costs of being a landlord (i.e. lettings agent commissions, insurance, tax, maintenance and repairs).

Capped Rate
This is basically a variable interest rate mortgage with a ‘ceiling’. You will still be able to benefit from any interest rate decreases but if interest rates rise, the maximum interest that you can be charged by your lender is the agreed capped rate. The set period for capped rates is normally 1 to 5 years before reverting to your lenders Standard Variable Rate.

Cash Back
Offered by some lenders as an incentive, you are given a payment in the form of a lump sum or a percentage of the mortgage upon completion of the loan. In the case of payments derived from a percentage of the loan amount, the cash back amount could be significant. Just be sure that you do not have to pay a higher interest rate in return for the cash back offer.

Current Account and Offset Mortgages
A Current Account Mortgage or CAM is a type of flexible mortgage linked to your current account. Interest is charged daily on this type of mortgage. Hence, each time you make a deposit into your current account (i.e. your salary), you are also reducing the amount of your mortgage on which you are charged interest.
In the case of Offset Mortgages, which work in a similar way to a CAM, the total of your savings and the balance of your current account are ‘off-set’ against your mortgage.

Discounted Rate
A type of Standard Variable Rate mortgage, you are offered a discounted rate for a certain period of time. For instance, if the SVR is 6% and there is a discount of 2% less, then you will be paying 4% interest during the set period. If interest rates happen to fluctuate, you will still be charged an interest of 2% below the lender’s SVR.

Fixed Rate
This allows you to pay a set rate of interest for an agreed period of time, generally between one and five years, but can be much longer depending on the lender. Once the agreed period of time expires you will begin paying your lenders Standard Variable Rate of interest, which will normally be much higher.

Flexible
A flexible mortgage is a form of variable rate mortgage which lets you make both over-payments and under-payments, hence you can overpay your mortgage when you are able to (for instance, you receive a bonus at work) and you are free to make under-payments if money becomes a little tight. Interest is also calculated daily, so in the case of over-payments, your mortgage benefits right away.

Foreign Currency
Specialist mortgage brokers can arrange home loans through lenders in the country where you wish to buy your property. Due to their knowledge of the local financial market, they will be able to source the most competitive rates. However, you will also be liable for local fees and taxes and that the broker will also charge for their service.

You can also take out a foreign currency mortgage in order to buy your property in the UK. You can organise a mortgage in US Dollars, Euros or Japanese Yen. The loan amount is then converted into Sterling and you purchase your property as usual. Your mortgage balance and the interest charged remain in the foreign currency, at the local rate of interest, while your monthly mortgage repayments are made in Sterling.

Home Income Plans
This type of equity release plan (also known as reverse mortgages) is designed to produce a monthly income for life for elderly homeowners. The loan is repaid once the last homeowner passes away or moves out of the property. This can either be as a result of the property being sold or, if the property is left to family members in the will, they can also opt to repay the loan by another means of finance, thus retaining the property.

Islamic Mortgages
The way Muslims conduct their financial affairs is governed by Sharia law. Under this convention, mortgages of the type available in the UK have never really been acceptable due to the fact that the charging or receiving of interest is not allowed.

In an Islamic mortgage, the lender and the ‘buyer’ purchase the property together. The lender provides the majority share of the purchase price while you give a smaller share, typically around 20%. Once the property has been purchased, you make two payments every month: one to the lender, to repay the loan, and another again to the lender, this time considered as rent for use of the property.

Let to Buy
This allows you to rent out your current property while buying a new house at the same time. Since you lender will need to know that the rental income from your home is likely to cover the mortgage on the new property, you will need to have your property valued for rental purposes. You will still be subject to the same application process on your new property as with any other type of mortgage.

Pension Linked
This is a form of interest-only mortgage. Payments are made out to a pension fund, as well as into a life assurance plan. The life assurance policy guarantees that your mortgage is paid if you die before the end of the loan term, while the pension plan will pay you a lump sum, plus a pension, when you retire. The outstanding balance of your mortgage will be covered by the cash lump sum.

Remortgages
Also called a second mortgage, this lets negotiate a new deal with your current lender, or move your mortgage to another. This enables you to lower your monthly repayments while still living in the property. Your new lender will go over a valuation of your home in order to assess your remortgage application. You may have many options available to you, just as in a new mortgage, You may choose between capped, fixed, or discounted rates of interest, plus whether you want a repayment mortgage or an interest-only mortgage.

Right to Buy
This system gives council tenants the option to buy their council home at a discount. You are considered eligible if you have been a council tenant for at least two years at the time you apply. The discount depends on how long you’ve been a tenant; ranging from 32 -60% on a house to up to 70% on a flat, with a maximum discount of £16,000. Any arrears (i.e. overdue or missed payments) need to be cleared before the purchase, and you should have no court orders, such as County Court Judgements (CCJs) for debt, against you.

Self-Build
This is a type of mortgage intended for people who want to build their own home, or are planning a major renovation of their existing one. Some lenders will make the loan available in order for you to purchase the land, while others will prefer to wait until work on the structure has begun. An arrears stage payment means that the lender gives out the funds as different phases of construction are completed. An advance stage payment mortgage means that the lender will give out money during the beginning of each construction phase.

Self-Employed
Also called non-status or self-certification mortgages, lenders will usually ask for at least 3 years of audited accounts proving your business’ profitability in order to consider your application.

Some mortgage lenders also offer self-certification mortgages. In these instances, the applicant provides an estimate of their annual earnings. Your credit history will be checked to appraise your ability to meet repayments, and your personal circumstances will determine what will be offered to you. In some cases, interest rates may be slightly above average.

Tracker
This is a type of variable rate mortgage where the interest rate is linked to the Bank of England base rate, on top of which the lender places a certain amount of set interest. While the base rate changes, you are charged this rate plus the extra interest, which remains constant.

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